Clean Tech Headed for Stagnation

Could the recent boom in U.S. renewable energy go bust? Yes, both in the short and long-term and only if we re-think U.S. energy policy can clean energy weather the storm.

To be sure, the U.S. clean energy industry has been in a period of rapid growth, largely due to historic federal investments in the research, development, deployment, and manufacture of clean technologies. From 2009 through 2014, the federal government will invest a total of $150 billion, or the equivalent in magnitude to government support for past national challenges like putting a human on the moon (~$170 billion in 2005 dollars over 10 years, pg. 25).

Yet clean energy continues to face a fundamental problem: it’s not cost and performance competitive with fossil fuels without government support outside of niche markets. In the short-term clean tech projects are propped up by government support (or regulatory requirements) and in the mid-term the industry requires significant innovations to become subsidy independent and competitive. As such two distinct policy issues are set to thwart industry growth: the looming decline in overall federal support for clean tech after 2014 and the continuing deficit in government support for clean energy R&D and innovation. Letting both policy issues linger unresolved could very well be the death knell for clean energy.

In the short-term, the very government support that is buoying uncompetitive clean tech deployment is set to decline drastically. According to the report by analysts at the Brookings Institution, Breakthrough Institute, and World Resources Institute, without any additional Congressional action 75 percent of federal clean tech policies are set to expire by 2014, including numerous incentives that subsidize the higher cost of clean tech projects. Without these incentives, the nascent transition from fossil fuels to clean energy will slow or halt all together, leading to a clean tech bust.

But even if much of this funding continues, the nascent clean tech industry is on a potential path of stagnation. In absence of long-term, significantly larger subsidies (which are politically unlikely), government support for clean energy R&D are central to developing and deploying competitive clean tech. In other words, clean tech growth nationwide (and globally) will be determined not by subsidies, but by innovation that can lead to technologies that are better and cheaper than fossil fuels.

Yet, our policy choices often don’t reflect this reality. According to ITIF’s Energy Innovation Tracker, the U.S. is investing roughly $6 billion in clean energy R&D in FY2012 – on average a third what leading experts think the U.S. should be investing. In fact, the bulk of the federal government’s historic investment in clean energy – nearly three quarters of the $150 billion – is going to the deployment of existing technologies that are not cost-competitive with fossil fuel sources of energy. While these deployment incentives expand domestic supply chains and are spurring incremental innovations, the policies are acting like blunt force tools propping up lower-risk technologies while playing little role in incenting innovation and technologies to put clean energy on a path to subsidy independence. By not orienting the significant federal investment in clean tech towards spurring innovation while grossly underfunding R&D, the U.S. is failing to jump start and accelerate the clean tech innovations needed to create a robust, long-term sustainable industry. Even if the expiring tax incentives are extended as is, the long-term stagnation of the industry will still occur due to a lack of innovation. If we want a global clean tech revolution driven by the marketplace, we need to bring the equivalent of “Moore’s law” (the prediction that computing power would double every 24 months while costs would fall by half) to clean energy. Nothing less will work.

But it’s not too late to avert both the short-term clean tech bust and long-term innovation stagnation if federal policymakers and clean energy advocates truly make innovation less like empty rhetoric and more its core goal. This means fully funding key clean energy innovation R&D programs even in a time of budget austerity. Consistent support for innovation is absolutely necessary – just ask the fossil fuel industry which continues to reap the benefits of a century’s worth of government largesse deficits or not – and cutting innovation programs does more harm than good to the deficit and economy.

Policymakers must also reform clean tech deployment subsidies to link early stage tech development with commercialization. Simply extending expiring or expired subsidies and tax incentives are simply not enough and will only continue to marginally grow the industry. It’s surely not a long-term solution to continue deploying technologies carte blanche even if they don’t hold the promise of competitiveness. A group re-think on clean tech subsidy programs is critical. It’s for “smart” deployment policies that work to pull transformative innovations, rather than just extend incremental innovations of costly energy technologies.

We need to ask ourselves what our energy policy goals are. Do we want a clean tech market full of Edsel’s or competitive technologies? Do we want marginal industry growth or do we want a global clean tech transformation? At the end of the day, significant industry growth is only possible if there is an aggressive flow of innovations linked with deployment policies that pull to market emerging, long-term competitive technologies. Today’s energy innovation ecosystem fails on both accounts and our policy choices are to blame.

About the author

Matthew Stepp is a Senior Analyst with the Information Technology and Innovation Foundation (ITIF) specializing in climate change and clean energy policy. His research interests include clean energy technology development, climate science policy development, transportation policy, and the role innovation has in economic growth.

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